Check Fraud, First-Party Fraud to Rise in 2023

Suparna Goswami: Hello there. I'm Suparna Goswami. I'm associate editor with Information Security Media Group. I have with me today Frank McKenna who is chief fraud strategist with Point Predictive and author of the blog FrankonFraud. Frank, welcome again and happy new year.

Frank McKenna: Happy new year, Suparna. I'm really happy to be here. I hope you had a good holiday and looking forward to a great new year.

Goswami: Frank, before I ask you to predict the types of fraud you will expect in 2023, how will you sum up the year 2022? What was the fraud highlights for you?

McKenna: You know, it was a year like no other. I don't think we've seen anything quite like it ever, which made it interesting to be in the kind of fraud field to see everything that happened. I mean, I think we saw things like check fraud in an old technology type of fraud, like check fraud, became the number one type of fraud. Who could have guessed that? We saw Zell fraud become really prevalent in the news, especially toward the end of the year when the government kind of stepped in and started to go after the banks to do more to try to help victims of scams. So that was a big story. You know, we saw new horrible scams emerge. We saw pig butchering, you know, very inhumane type of scam where you're treating the victim like an animal. And we saw that scams just continued to proliferate in and just get worse and worse. We saw interesting things happen around fake accounts. So, Elon Musk, he thought about 20% of Twitter's accounts were fake and made up by bots, we saw PayPal, another large FinTech, identify 4.5 million fake accounts. It actually hit their stock price, because it was such a big story. That just showed how prevalent that this synthetic identity problem that this fake account problem is having across banking and FinTech. And then finally, toward the end of the year, we just saw crypto implode, we're in massive bubbles for real estate, for mortgage, for crypto, for stock market, for bonds - bubbles were everywhere. Everything was really frothy, even venture capital. And we saw that bubble burst. And when that bubble burst, we saw all of this fraud start to rise up. And that just kind of capped off the year - a really big year in fraud with lots of interesting stories and lots to keep us busy.

Goswami: Sure. Clearly we can say that 2022 would be a year of scams as well as year of crypto fraud. And that's where my next question is. So did the rise of crypto fraud or NFT surprise you? Were you expecting this?

McKenna: Crypto fraud. Did it surprise me? Not in the least. I mean, many of us knew that we'd seen this before, we looked at the 2008-2009 mortgage crisis where everything was in a bubble. Crypto was just ripe for fraud, for scams, for money laundering, you know, when you have these fiat currencies that are really tied to nothing, with the exception of Bitcoin, I think that's a little more legitimate, but these other cryptos - I was not surprised at all that they were subject to so much fraud. In fact, I knew it was going to happen, it was just a matter of time.

Goswami: So how do you see this particular kind of fraud evolving or changing this year?

McKenna: So what I think is going to happen - I think the dominoes are going to continue to fall. And we're just kind of in the middle of it right now. And company after company, crypto after crypto is just toppling. I think we're just going to see a lot of these cryptos just go under, I think we're going to see a lot of the celebrities and the social media influencers that were touting NFTs, touting crypto, selling them, getting involved - we're going to see more of those celebrities and influencers get into a lot of trouble for what they did during that crypto bubble. I think we're going to see a lot more regulation. I think that's a given. I think in 2023, there's going to be a lot more scrutiny on how do we regulate this market. So it's going to be a huge year for a lot of changes in crypto. And it may not look anything like it looks right now, it may completely change.

Goswami: So finally, we are in trade when it's free. So what would be your predictions for the year?

McKenna: So my predictions for the year is that we're going to see another significant year for fraud. And it's not surprising, you know, fraud keeps rising. We're in a market, we're in an environment where anybody can be anything on the internet. And so, we're seeing that fraud just continue to increase. So I think many things are going to happen. I think check fraud number one is going to hit $24 billion or more this year. That's a 50% increase over the last time it was measured in 2018. That rise in check fraud, what's going to happen is that banks are going to start to have to address it. So you're going to see banks start to implement newer technologies, you're going to see banks start to try to solve the problem of these identity theft and fake accounts that are getting the bank accounts and depositing fake checks, you're going to see banks start to encourage people not to write checks anymore and use online banking, maybe some banks will get rid of checks altogether. I think that's going to be a big story in fraud. I think the second thing with scams, we're going to see a major change, consumers will start to be able to get their money back. And they're going to be able to request for banks to get reimbursed, that's going to create a whole host of new problems for banks, we're going to see a lot of first-party fraud claims with those scams, we're going to see a lot of people exploiting banks and trying to get refunds when they don't deserve. That's going to put banks on the defensive, it's going to make banks really invest and have to spend a lot of time in scam reimbursement. I think we're going to see problems with digital acquisition. So when banks and lenders are signing people up online, I think what we're going to see there is that some of these banks are going to turn off that digital acquisition, banks are going to have so much fraud. In some cases, some banks are reporting a 70% fraud rate, up to 70% of the applications that are not online or fraud. That's just untenable. So banks are going to - some things will have to shut off those programs. It happened last year. It's going to happen again this year. I think that some of the other things we're going to see is we're going to see a lot more insider fraud. So when I scan telegram and I scan the dark web, I'm seeing a lot of advertisements for these fraudsters who are advertising that they have an inside connection at merchants, at telcos, at phone stores, they say they have an inside connection, and they can get you SIM swaps, account takeovers, they can get you PII. I think there was somebody just arrested yesterday for stealing - an employee from Navy Federal Credit Union who was stealing PII. That's going to happen a lot this year. So we're going to see a lot of insider fraud. We're going to see and I think this is the big unknown. We're going to see AI being used by fraudsters and scammers. You know, the big story at the end of last year was OpenAI's ChatGPT product. That I think opened people's eyes to the power of artificial intelligence. But at the same time, that put these powerful AI tools in the hands of everyone, including fraudsters. We're going to see a new era of fraud fighting, where fraudsters are leveraging AI that says powerful, or sometimes even more powerful than what the banks and lenders have. That's going to be a real interesting juxtaposition of how fraud is going to be addressed with this kind of back and forth between fraudsters and scammers and the bank. So I think we're going to see a new war on fraud, that's going to be much more technological. I think there's going to be a likely recession, it may not be a very deep recession. But I think that's going to push up a lot of the fraud risk and defaults pretty substantially. In lending, maybe 50%, maybe more. Those are the types of things that I'm expecting this year. As always, I think we can expect the unexpected. There are going to be things that are going to happen we could have never predicted. And I think 2023 is no exception.

Goswami: I'll come back to you on to check fraud as well as the scams, but as you mentioned, recession and likelihood of recession. So do you think the economic downturn will also lead to more insider fraud?

McKenna: Absolutely. So when you have - and we see this time and time again - you see it, I think the ACFE, who tracks insider fraud, you know, globally, they consistently report in times of recession, you see a lot more insider fraud. And why is that the case? It's the case because people get more desperate, people are more desperate for money, or opportunity. And so they resort to trying to make money if they're an insider trying to make extra money or resorting to fraud by selling information, by giving access to information, by doing all sorts of things that they should not be doing. But I also think it creates more opportunity for people on the outside to go to those people to try to get information, to try to get money, to try to exploit banks and lenders on policies.

Goswami: Sure. So back to scams and check fraud. So, in fact, check fraud has always been me curious. So how do you see banks handling this check fraud in 2023? What new ways can they tackle it and even for scams, as you said, regulators will probably come out with a formal regulation where they would have to pay back the customers for certain kinds of scams. So how do you see banks tackling these issues?

McKenna: Yeah, so I think with scams in particular, I'm not sure that banks will actually reimburse for check scams. They may. But I think what the banks are going to reimburse for is more the Zell, the more PDP account takeover type scams where the consumer was exploited, where they gave out their one-time passcode or their login information. So I don't think that the checks will really play much of a part into the reimbursements. However, in saying that banks are going to grapple with check fraud this year, and I think they're going to do a few things, I think the first thing they're going to do is invest in new technology, I think there's going to be new technology investment in checks, because it's so high, I think the second thing that's going to happen is banks are going to start to scrutinize their mules problem, where these are people that are getting these accounts, typically they're the neobanks, they're getting these accounts, they're opening them up with the express purpose of depositing fraudulent checks, and then going to the ATM to withdraw them. I think banks are going to implement new technology that's going to be able to stop that. I think banks are going to also do a lot more customer education on checks. They're going to try to get consumers to stop writing checks, to go to online banking, to use other forms of payments that are not as subject to all the types of fraud. I think that's the way that banks are going to address check fraud in 2023. But I don't think it's going to be easy. I think it's going to be a real challenging year for check fraud for banks.

Goswami: And even for scams, the authorized payment scams, the Zelle fraud. So how do you think banks should tackle first-party fraud?

McKenna: I think banks need to first be aware that first-party fraud exist, and that is perpetrated by customers. I think what happens a lot of times with banks is there's a failure to recognize the difference between an identity thief who's a third-party fraudster and then a person that's trying to steal from you who's a real person - is a real person behind first-party fraud. Maybe they're even using their own name. They're using their own identity. Banks need to be able to accept that that's the type of fraud they're going to try to stop. They're going to have to work with their marketing departments, their origination department, say, "We're not going to tolerate people that are coming in to exploit the bank." I think that's step one. I think step two is once you make that acknowledgement, use a lot of your same tools that are looking for fraud, for third-party fraud and use them in the same way. But look for first-party fraudsters, these people may not be using fake identities, they may not be using stolen identities, they may be using their own identity, but they may be hitting bank after bank after bank. So you're going to want to look at those types of people and tackle those first-party fraudsters a little bit differently, but using the same technology to use for all the other types of fraud.

Goswami: And finally, Frank, technology wise, what is the one technology that you are looking forward to in the year 2023, which you think will help reduce fraud a great deal?

McKenna: You know, there's a few. I can't just name one. But I'll tell you what I'm excited about. I'm excited about biometrics, I think biometrics have a long way to go in terms of how they can help bank with both scams and fraud. I love passwordless authentication, I think I talked a little bit about in my blog post that I did with Mary Ann Miller, by the way, and Karisse Hendrick, I can't take full credit for that because we all did that together. But we're all really excited about passwordless authentication, about you know, if you think about 80 to 90% of the account takeovers are because of these credential stuffing. If we can get rid of that, that's going to make a huge impact on fraud. So I'm excited about that. I'm excited about the stuff that we're doing at Point Predictive honestly, the stuff that we're doing around data, alternative data and AI. And then finally, I'm really excited to see what the industry does with AI. Because I think what we've seen over the last year is the absolute explosion of AI and the power that it can represent. I think where we're going to see a lot of advancement is in the use of AI, both in use by fraudsters but anti-fraud as well. I'm really excited to see where that goes. So there's quite a few things that I'm keen on for 2023.

Goswami: Let's see how 2023 unfolds for us when it comes to fraud. But thank you so much, Frank, for sharing your views with us. As always, a pleasure speaking with you.

McKenna: Yes, thank you, Suparna. Thanks for giving us a platform to talk about fraud, to talk about things that are going to happen this year because my thought is if we collaborate on fraud, if the industry works together, that we know more about it, we can just get better at it. So I appreciate you giving us platform to talk about it and you have a very happy new year.

Goswami: Thank you. You were listening to Frank McKenna for ISMG. This is Suparna Goswami. Thank you so much for watching.